Table Of ContentA PEEK AT ANCILLARY RESTRAINTS DOCTRINE
THROUGH THE NEW DEFENCE IN THE AMENDED
COMPETITION ACT
MICHAEL EGGE
PATRICK ENGLISH
LATHAM & WATKINS LLP
WASHINGTON, DC
The Canadian Bar Association
2010 Competition Law Spring Conference
May 17, 2010
Toronto, Ontario
A PEEK AT ANCILLARY RESTRAINTS DOCTRINE THROUGH THE NEW
DEFENCE IN THE AMENDED COMPETITION ACT
Michael Egge*
Patrick English
INTRODUCTION
On March 12, 2009, Bill C-10, otherwise known as the Budget Implementation Act (“Bill
C-10”), received Royal Assent. Bill C-10 consists of numerous amendments that, taken together,
arguably represent a significant paradigm shift in how the Competition Bureau (the “Bureau”)
and the Director of Public Prosecutions (“DPP”) in Canada challenge agreements between
competitors. Notably, for purposes of this paper, the revisions to the Competition Act (the
"Act") found in Bill C-10 expressly adopt an “ancillary restraints defence” (“ARD”) to what are
otherwise widely considered the province of hard core cartel conduct – agreements to fix price,
allocate markets and/or restrict output. To U.S. practitioners the codification of the ancillary
restraints doctrine, a staple part of U.S. joint conduct analysis, as a “defence” to criminal
antitrust charges appears at first a peculiar way of approaching ancillary restraints. But with a
closer look at our own antitrust statute, which provides absolutely no clarity as to what can be
prosecuted criminally versus civilly, the peculiarity reverses direction. It makes good sense as a
matter of law to provide that clarity, particularly as to the circumstances that might result in
punishment as severe as incarceration. Nevertheless, it is still striking to see the doctrine
articulated as a “defence” against criminal challenge because it is a broad and deep concept that
in the U.S. profoundly shapes the assessment of joint ventures and other forms of joint conduct,
and has both civil and criminal enforcement ramifications. With over a hundred and ten years of
judicial decisions interpreting the doctrine since then, ancillary restraints is one of the richest and
most informed areas of U.S. antitrust law.1
*Michael Egge is a partner in Latham & Watkins’ Washington office and Co-Chair of the Global Antitrust
and Competition Practice Group at Latham. Patrick English is an associate in Latham & Watkins’
Washington DC office. The authors would like to extend a special thanks to Adam Fanaki of Davies,
Ward, Phillips & Vineberg LLP for his kind comments and assistance in the preparation of this article.
1 The U.S. Supreme Court’s first discussion of the ancillary restraints doctrine dates back to 1899, only ten
years after Canada’s first competition legislation. Addyston Pipe and Steel Co. v. United States, 85 F. 271
(6th Cir. 1898), aff’d as modified 175 U.S. 211 (1899).
2
The defence, as articulated in the revised Act, surely captures the major thresholds that
have been distilled over so many years in the US – ancillarity and reasonable necessity – and the
Competition Bureau’s Competitor Collaboration Guidelines (the “Guidelines”) likewise capture
many of the same points of assessment that have been developed in the US. The one thing that
appears to be missing, however, in both the Act and the Guidelines is a threshold requirement of
integrative economic efficiencies in the joint conduct that support ancillary restraints. This may
be much to do about nothing since the ARD, as used in the Act, is a defence to criminal
prosecution whereas in the United States the doctrine arguably represents so much more – it
permits a wholesale shift from an unyielding per se standard to a defense-friendly rule of reason
standard in civil damage actions. Using a lower threshold for escaping criminal prosecution
may make good sense; the U.S. Department of Justice after all has behaved consistently with its
enforcement intention to only pursue “naked” agreements to fix price, allocate markets or restrict
output criminally.2
The gap, intended or not, nevertheless exists. The Guidelines say very little about
integrative efficiencies – they recognize efficiencies as a factor behind collaborative activity that
may inform the ARD, and generally as a pro-competitive benefit to be weighed against
anticompetitive effects in the analysis applied to civil challenges of competitor agreements in
Section 90.1, but neither the Act nor the Guidelines appears to require the presence of integrative
efficiencies in the first place. This presents an ideal area of focus as we share here the U.S.
experience with applying the ancillary restraints doctrine.3 The remainder of this paper first
introduces as background the relevant amendments to the Act that contain the new ARD, then
discusses the current state of the ancillary restraints doctrine in the U.S. and walks through a
sampling of its application in both well-known and less well-known cases, and concludes with
some practical observations about the ARD that fall out of the U.S. experience.
2 U.S. Department of Justice Antitrust Division Manual 4th ed., Chapter III Section c5 (“In general, current
Division policy is to proceed by criminal investigation and prosecution in cases involving horizontal, per se
unlawful agreements such as price fixing, bid rigging, and customer and territorial allocations”).
3 There is no telling whether this observation is meaningful or not since these revisions and the ARD have
only come into force two months ago. Experts have stated that there is no choice but to “wait and see”
how tribunals will rule based on the language of the act. See, e.g., Barry Zalmanowitz, “New Rules in
Canada – What a Cross-Border Business Needs to Know” (April 21, 2010), ABA Antitrust Section Annual
Spring Meeting Session. There is no jurisprudence in the Canadian court system on major terms like
“reasonably necessary” so there are no signals that indicate what courts will do.
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I. BRIEF BACKGROUND
One of the most significant changes in the Act is the adoption of a dual track approach to
agreements between competitors, one for criminal enforcement and another for civil
enforcement. Section 45 of the revised Act, which essentially adopts a per se standard for “hard
core” antitrust violations, delineates the “ancillary restraints defence.” The relevant parts are:
Conspiracies, agreements or arrangements between competitors
45. (1) Every person commits an offence who, with a competitor of that person with respect
to a product, conspires, agrees or arranges
(a) to fix, maintain, increase or control the price for the supply of the product;
(b) to allocate sales, territories, customers or markets for the production or supply
of the product; or
(c) to fix, maintain, control, prevent, lessen or eliminate the production or supply of
the product.
(2) Every person who commits an offence under subsection (1) is guilty of an indictable
offence and liable on conviction to imprisonment for a term not exceeding 14 years
or to a fine not exceeding $25 million, or to both. . . .
(4) No person shall be convicted of an offence under subsection (1) in respect of a
conspiracy, agreement or arrangement that would otherwise contravene that
subsection if
(a) that person establishes, on a balance of probabilities, that
(i) it is ancillary to a broader or separate agreement or arrangement that
includes the same parties, and
(ii) it is directly related to, and reasonably necessary for giving effect to, the
objective of that broader or separate agreement or arrangement; and
(b) the broader or separate agreement or arrangement, considered alone, does not
contravene that subsection.
Agreements between competitors can alternatively be challenged by the Bureau before
the Competition Tribunal under the new Civil Agreements provision at Section 90.1, which
provides in relevant part as follows:
Agreements or Arrangements that Prevent or Lessen Competition Substantially
Order
90.1 (1) If, on application by the Commissioner, the Tribunal finds that an agreement or
arrangement — whether existing or proposed — between persons two or more of
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whom are competitors prevents or lessens, or is likely to prevent or lessen,
competition substantially in a market, the Tribunal may make an order
(a) prohibiting any person — whether or not a party to the agreement or
arrangement — from doing anything under the agreement or arrangement; or
(b) requiring any person — whether or not a party to the agreement or
arrangement — with the consent of that person and the Commissioner, to take
any other action.
(2) In deciding whether to make the finding referred to in subsection (1), the Tribunal
may have regard to the following factors:
(a) the extent to which foreign products or foreign competitors provide or are likely
to provide effective competition to the businesses of the parties to the agreement
or arrangement;
(b) the extent to which acceptable substitutes for products supplied by the parties to
the agreement or arrangement are or are likely to be available;
(c) any barriers to entry into the market, including…
(d) any effect of the agreement or arrangement on the barriers referred to in
paragraph (c);
(e) the extent to which effective competition remains or would remain in the
market;
(f) any removal of a vigorous and effective competitor that resulted from the
agreement or arrangement, or any likelihood that the agreement or arrangement
will or would result in the removal of such a competitor;
(g) the nature and extent of change and innovation in any relevant market; and
(h) any other factor that is relevant to competition in the market that is or would be
affected by the agreement or arrangement.
(3) For the purpose of subsections (1) and (2), the Tribunal shall not make the finding
solely on the basis of evidence of concentration or market share.
(4) The Tribunal shall not make an order under subsection (1) if it finds that the
agreement or arrangement has brought about or is likely to bring about gains in
efficiency that will be greater than, and will offset, the effects of any prevention or
lessening of competition that will result or is likely to result from the agreement or
arrangement, and that the gains in efficiency would not have been attained if the
order had been made or would not likely be attained if the order were made. . . .
On March 12, 2010, these sections came into effect.
Both Sections contain subparagraphs that make clear that the same conduct cannot be
challenged under both provisions – in effect, the Bureau has to decide whether to challenge
under either Section 45 or Section 90.1 of the Act. To aid in counseling firms about the risks of
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competitor collaborations, the Bureau issued the Guidelines that inform the analysis the Bureau
will undertake in deciding whether to challenge competitor agreements under either Section 45
or Section 90.1. In those Guidelines, the Bureau adopts a policy stance for criminal enforcement
that is much like the U.S. Department of Justice – it reserves for criminal enforcement “naked
restraints” on competition between competitors. Naked restraints is, as in the U.S., shorthand for
saying the restraint is not ancillary to legitimate conduct and thus not subject to the ARD. The
Bureau in its Guidelines repeats the maxim that naked restraints on competition “are not
implemented in furtherance of a legitimate collaboration, strategic alliance or joint venture.”
Neither the Act nor the Bureau in its Guidelines, however, describe what makes a
collaboration, strategic alliance or joint venture legitimate or not for purposes of applying the
ARD (other than the Act’s requirement that the broader, separate joint conduct not itself be a
price fixing, output or market allocation agreement in contravention of Section 45(1)), making it
difficult to counsel when a restraint is implemented in furtherance of a legitimate collaboration.
In comparison, the Antitrust Guidelines for Collaborations Among Competitors Issued by the
Federal Trade Commission and the U.S. Department of Justice (April 2000) require “an
efficiency enhancing integration of economic activity” as a threshold for application of the
ancillary restraints doctrine. As a matter of practice the Bureau of course very well might apply
the same screen, which suggests it may recommend challenge of agreements that may still be
ancillary to a broader agreement that is neither an agreement in contravention of Section 45 nor
an agreement that yields integrative efficiencies. The difficult issue then is what a court will do
given that Section 45(4) itself does not require integrative efficiencies.
II. U.S. JOINT VENTURE LAW
The backbone of the ancillary restraints doctrine in the U.S. is the treatment of
collaborative activity between competitors, or, broadly speaking, joint ventures. U.S. courts
typically analyze joint ventures under a rule of reason because it is widely believed that joint
ventures foster or facilitate certain integrative efficiencies that are pro-competitive. Not all joint
ventures, however, command such treatment. In order to qualify as a joint venture subject to rule
of reason analysis, there must be some form of economic integration, i.e., the pooling of the
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participating parties’ resources and the sharing of risks,4 or the creation of a new product that
would otherwise not be available absent collaboration of some form.5 U.S. courts have been
careful not to raise form over substance in determining whether joint activity rises to the level of
a joint venture whose competitive constraints are deserving of rule of reason treatment. They
have applied per se treatment to arrangements that were called joint ventures,6 and, conversely,
have applied rule of reason treatment to joint activity even where the existence of a joint venture
was not readily apparent.7
The identification of an economic integrative efficiency thus pulls joint collaborative
activity, and the restraints on competition ancillary to it, out of an unyielding per se analysis to a
far more hospitable place – a more exacting inquiry into competitive effects. It is rather
remarkable that U.S. antitrust law, which treated as per se illegal maximum and minimum resale
price maintenance until 1997 and 2007, respectively,8 has for so long acknowledged the benefits
of collaboration between horizontal competitors and provided a construct that gave competitors
ample running room to pursue integrative efficiencies. That construct is the ancillary restraints
doctrine, which simply provides that in the presence of legitimate joint conduct, competitors can
agree to restraints that otherwise would be regarded as per se illegal as long as they are (i)
ancillary or supportive of broader, legitimate joint conduct and (ii) reasonably necessary to
4 Arizona v. Maricopa County Medical Society, 457 U.S. 332 (1982) (fact that doctors participating in setting
maximum fees were in business individually and did not pool their capital and share the risks of loss
decisive in court’s refusal to afford rule of reason treatment to joint activity)
5 National Collegiate Athletic Association v. Board of Regents, 468 U.S. 85 (1984) (college football
competition, as a product, unavailable without collaborative effort); Broadcast Music, Inc. v. Columbia
Broadcasting System, Inc., 441 U.S. 1 (1979) (blanket license for musical compositions impossible without
joint activity)
6 COMPACT v. Metropolitan Government of Nashville & Davidson County, 594 F. Supp. 1567, 1574 (M.D.
Tenn. 1984) (finding lack of any integrative efficiency, in this case an increase in new productive capacity,
condemned competitive restraints in “joint venture” to per se treatment); Engine Specialties, Inc. v.
Bombardier Limited, 605 F.2d 1, 8 (1st Cir. 1979) (joint activity pursuant to contract which contemplated a
joint venture that never materialized analyzed under per se rule)
7 Rothery Storage & Van Co. v. Atlas Van Lines, Inc., 792 F.2d 210 (D.C. Cir. 1986); National Bancard
Corp. v. VISA USA, Inc., 779 F.2d 592 (11th Cir. 1986)
8 State Oil Co. v. Khan, 522 US 3 (1997). Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 127 S. Ct.
2705 (2007).
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achieve the purpose of that venture.9
U.S. courts regard a restraint as ancillary if it is “subordinate and collateral to a separate,
legitimate transaction” and “serv[es] to make the transaction more effective in accomplishing its
purpose.”10 In the case of price fixing, for example, the restraint would be ancillary if it
“achieved purposes unrelated to price formation.”11 Reasonable necessity spans a rather broad
array of factors. One of them is what restraints are necessary to induce output-enhancing
cooperation and risk-sharing, and, relatedly, prevention of free riding and economic feasibility.12
Others include the scope of the restraint and the existence of available less restrictive
alternatives. A restraint must be no broader than necessary in terms of product, time and
territory, to accomplish the purpose of the larger agreement.13 “If [the restraint] is so broad that
part of the restraint suppresses competition without creating efficiency, the restraint is, to that
extent, not ancillary.”14
III. ILLUSTRATIVE U.S. CASE PROFILES
What follows is a series of cases that illustrate the emphasis on integrative efficiencies
and a general willingness to defer to business judgment on what will best facilitate such
efficiencies. Each case thoughtfully discusses the ancillary restraints doctrine. These cases are
9 See Lektro-Vend Corp. v. Vendo Company, 660 F.2d 255 (7th Cir. 1981), cert. denied, 455 U.S. 921 (1992);
Rothery Storage and Van Co. v. Atlas Van Lines, 792 F. 2d 210, 224 (D.C. Cir. 1986), cert. denied, 479
U.S. 1033 (1987).
10 Rothery, 792 F. 2d at 224.
11 Nat’l Bancard Corp. v. VISA U.S.A., Inc., 779 F.2d 592, 599 (11th Cir. 1986).
12 See Polk Bros. Inc. v. Forest City Enterprises, Inc., 776 F.2d 185 (7th Cir. 1985) (In upholding the covenant
not to compete as an ancillary restraint, the court emphasized the important role of the covenant played
inducing cooperation between the parties because the parties would not have agreed to pursue the joint
venture without the covenant.); Business Review Letter from William F. Baxter, Assistant Attorney
General, Antitrust Division, Department of Justice, to Irving B. Yoskowitz, United Technologies
Corporation (October 27, 1983) (In stating intention not to challenge the scope of a right of first refusal in a
jet engine development agreement between competitors, DOJ recognized “economic feasibility” as a
legitimate basis to approve an expanded scope of restraint as reasonably necessary); Van Dyk Research
Corp. v. Xerox Corp., 478 F. Supp. 1286 (D. N.J. 1979) (world wide market divisions in license agreements
were reasonable and ancillary “to the formation of speculative business venture.”) aff’d, 631 F.2d 251 (3d
Cir. `980), cert. denied, 452 U.S. 905 (1981).
13 Verson Wilkins Ltd. v. Allied Products Corp., 723 F. Supp. 1, 10 (N.D. Ill. 1989).
14 Rothery, 792 F. 2d at 224. See also 7 P. Areeda, Antitrust Law ¶ 1505 at 383-84 (“the restraint must not
only promote the legitimate objective but must do so significantly better than the available less restrictive
alternatives.”)
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not the leading cases used by most to define the U.S. ancillary restraints doctrine but rather a mix
of rather pedestrian, run-of-the-mill decisions and more well known, higher profile decisions you
may recognize either by name or fact pattern. The common thread in all of these cases is the
identification of a bona fide integrative efficiency as a threshold requirement to eliminate the
possibility of a naked restraint and apply a more rigid analysis of competitive effects.
A. In Re ATM Fee Antitrust Litigation
In Re ATM relates to a challenge to the setting of fees paid by debit card-issuing banks to
ATM owners. Debit card holders alleged that the banks, who were ATM network members,
were guilty of price fixing for pre-arranging the amount of these fees in lieu of allowing each
ATM owner and bank to work out a fee individually. The court rejected the plaintiff’s complaint
and held that the restraint was necessary to ensure the viability and development of the ATM
network.
To understand the case, one must understand what happens when a customer uses their
debit card at a foreign ATM machine (one that is not owned by their bank). There are four
parties typically involved in such a transaction: (i) the customer, (ii) the card issuing bank, (iii)
the ATM owner and (iv) the “ATM network,” an entity that coordinates agreements between
banks and ATM owners so that customers can access their account and secure funds from any
member in the network. The bank must pay two fees when a customer withdraws funds from a
foreign ATM: a switch fee to the network and an interchange fee to the ATM owner. Plaintiff
debit card holders brought suit against banks who were members of the ATM network, arguing
that the setting of network-wide interchange fees constituted illegal price fixing.15
Plaintiffs also attempted to preempt an ancillary restraints defense by further alleging that
the interchange fee agreement was a “naked” attempt to fix prices, and thus not ancillary to a
legitimate, pro-competitive venture.16 They argued that it was not necessary to set such fees to
sustain the network. Defendants responded that the fee was necessary to compensate the ATM
owner for making their ATM available and taking on the costs and risks associated with that
15 In re ATM Fee Antitrust Litig., 554 F. Supp. 2d 1003, 1007-8 (N.D. Cal. 2008).
16 Id. at 1008.
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decision. The defendants argued that without such fees, the owner would not participate in the
network because there would be no guarantee of reimbursement.17
The court agreed with the defendants and discussed a separate set of reasons why the fees
were both ancillary and necessary to the network’s existence. The ATM network needed a
uniform set of rules to operate properly.18 If every individual ATM owner had to negotiate
separate arrangements with every card-issuing bank, the efficiencies of the system would be
lost.19 The fees supported the venture because they created an incentive for the introduction of
additional ATMs, thereby increasing competition.20 Having found the fee-setting was both
ancillary and reasonably necessary to achieve the efficiency-enhancing purpose of the venture –
widespread access to funds from foreign ATMs and the proliferation of ATMs generally, the
court ruled the agreement could fall under rule of reason review.21
This ruling is instructive in two ways. First, it exhibits the respect that the U.S. judicial
system has for the potential of these agreements to lead to greater efficiencies and pro-
competitive benefits in the market place. The opinion states, “the network here is a legitimate
integrated venture, not a sham cartel, and thus the assumption is that it is creating efficiencies
that would not be possible otherwise.”22 Second, and arguably more compelling, is that the
opinion demonstrates a certain humility towards the business judgment of defendants in
effectuating desired efficiencies.
17 Id. at 1008-9.
18 Id. at 1015 (citing Regents of the University of California v. American Broadcasting Companies, 747 F.2d
511, 517 (9th Cir. 1984).
19 Id. at 1016.
20 Id. at 1015.
21 If restraints are “necessary if the product is to be marketed ‘at all,’ restraints that are reasonably ancillary to
the legitimate cooperative functions of the venture qualify for rule of reason treatment.” Id. at 1013-14
(citing Law v. NCAA, 134 F.3d 1010, 18-19 (10th Cir. 1998)).
22 Id. at 1012 (citing Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 768 (1984).
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Description:"Act") found in Bill C-10 expressly adopt an “ancillary restraints defence” (“ARD”) to what are Patrick English is an associate in Latham & Watkins'.
